Pensions, that's a conversation stopper. How to clear a bar in a split second. However it is one of our biggest investments next to our house and the pitfalls are considerable. I'll review the impact from the budget but also start with a very important tip that could save you thousands.
I looked at a pension case recently which was startling. The customer, like many, had started an old Abbey life pension scheme some time ago. She reached the age of 60, but left the pension scheme invested as she didn't need it, and let it continue to grow/fall.Â This is quite common but potentially very flawed.
Abbey didn't have a current address, marked her as 'gone away', and without successfully tracing her (I am not sure what effort they made) actioned an amazing clause in her pension scheme.
Apparently the clause states they can vest her pension fund at normal retirement date, and, without any discussion as to the type of scheme with the owner, increasing of benefits at retirement, or anything of that nature, just decide on an annuity. This is quite staggering. Rather than do the obvious thing and make the plan paid up (it just stays there and continues to grow) and await an instruction pre age 75, their clause says they can just buy the annuity.
Now I know what you are thinking – where did they pay the pension to if they don't know where the person is? Apparently in situations like this they would just pay the money into a cash account until the person comes forward.
It is therefore worth remembering two things: Contractually you are obliged to inform your policy provider of any change of address; be sure to check for any clauses like this in your normal policies.
This customer would have been forced into an annuity with a provider who I suspect is as competitive as France's next world cup game.
On a simple quote I found the difference between Saga and Prudential who were in 6th place was Â£531 per year for a fund of Â£120, 000.(1) Over 25 years that's Â£13,275. Abbey won't give me a quote as they are closed to new annuity business so my point re France is probably well made.
So how has the budget affected pension planning?
The government have entered a consultation period to remove the age at which we are forced to use our pension fund to buy an annuity. It is currently set at 75. The rule is expected to be removed by 2011-12 and those reaching age 75 on or after 22/6/2010 will not have to secure an income until age 77. There is still a requirement to act before age 75 so in the interim a pension scheme member must take their pension lump sum and go into an unsecured pension (which could be nil) before their 75th birthday.
It was also intended to reduce higher rate tax relief for pensions but the government have said this would be too complicated and expensive to implement so they are now studying options to reduce the amount that can be paid into pensions and setting the annual allowance to around Â£30,000 to Â£45,000 from April 2011. Those with income levels above Â£30,000 and below Â£130,000 have an opportunity to make contributions before then which are above the level proposed post April 2011.
It has been widely announced that the state pension age will now be increased to age 66 and that will be accelerated to 2016. Furthermore, to account for longer life expectancy it is expected that men will have a new state retirement age of 70. Hmmm. Life expectancy in the UK is 77.2 for a male so as a 42 year old I am now very motivated to invest into a state pension! I will just have lost five years of pension benefits. But lucky me, I will now not be forced to retire at age 65 and I can work longer – right bang top of my list of things to do.
For advice on pensions call Peter on 0845 230 9876, e-mail email@example.com or take a look at our website www.wwfp.net
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'